1.9 Types of market failure and government intervention to address market failure in Australia’s economy

FIGURE 1.23 Some recent events affecting the markets for crops and livestock.

–6%

to US$ 310/t in 2022–23 Wheat

World wheat prices to ease but remain historically high.

Barley Coarse grain prices to ease due to increasing global supply.

Canola Decreased canola price driven by recovering global canola production. Sugar Fall in international sugar price driven by recovering global production.

to US$ 266/t in 2022–23 –7% to US$ 310/t in 2022–23 –26% to USc 17lb in 2022–23 –11% to 1,659 Ac/kg in 2022–23 19%Wool Strong economic growth in advanced economies to lift wool prices. Saleyard cattle Easing rebuilding sees prices fall, but remain historically high. Cotton The easing of supply chain distruptions to cause a decline in cotton prices. Saleyard lamb Strong export demand in the US is expected to support high lamb prices. Milk Constrained global milk supply and strong global demand is forecast to push the farmgate milk price higher. to 718 Ac/kg in 2022–23 –9% to USc 98lb in 2022–23 –16% to 934 Ac/kg in 2022–23 5% to 61 AC/L in 2022–23 5% Source: Images copied from Department of Agriculture, water and the environment, ABARES, Agricultural forecasts and outlook, March 2022, Volume 12.1, various pages, see https://daff.ent.sirsidynix.net.au/ client/en_AU/search/asset/1033304/0. UNCORRECTED PAGE PROOFS

12. Examine figure 1.24, which represents a hypothetical demand and supply graph for hot dogs purchased from competing shops along St

Kilda Beach in Melbourne. a. Describe the change in the demand for hot dogs from D1 to D2. Outline one microeconomic demand-side factor that might have caused this change in demand. (2 marks) b. Explain how the equilibrium market price and equilibrium market quantity of hot dogs adjusts from E1 to E2. (3 marks) c. With reference to this market for hot dogs, explain the role of the price mechanism (market mechanism) in changing the pattern of resource allocation. (2 marks) FIGURE 1.24 The demand and supply of hot dogs Price per hot dog ($) P2/4.00 P1/3.00 800 1200 1600 Quantity (number of hot dogs per day)

E1 D1

E2

S1 D2 13. Explain how the operation of Australia’s market system normally allocates scarce resources efficiently between competing uses. Support your explanation with reference to recent price changes that have occurred in various Australian or global markets. (6 marks) Solutions and sample responses are available online. 1.8 The meaning and significance of price elasticity of demand and supply KEY KNOWLEDGE • the meaning and significance of price elasticity of demand and supply • factors affecting price elasticity of demand: degree of necessity, availability of substitutes, proportion of income and time • factors affecting price elasticity of supply: spare capacity, production period and durability of goods. Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. We already know that the quantity of a good or service demanded or supplied either expands or contracts when there is a change in its price (i.e. this is illustrated by a movement upwards or downwards along the line or curve). Indeed, this is the basis of the laws of demand and supply. Price elasticity further refines this concept by measuring the degree of responsiveness or sensitivity of the quantity demanded or supplied, to a given change in price. 1.8.1 Factors affecting the price elasticity of demand Elasticity measures the responsiveness or sensitivity of the quantity of a good or service demanded or supplied when there is a change in its price. According to the law of demand, the quantity demanded varies inversely with a change in its price — when the price goes up, demand contracts; when the price goes down, demand expands. However, the price elasticity of demand measures the responsiveness of the quantity demanded relative to the percentage change in price. For instance, given a rise in price, elasticity measures whether, in UNCORRECTED PAGE PROOFS percentage terms, the quantity demanded contracts by a lot or just a little. Price elasticity of demand measures the responsiveness or sensitivity of the quantity of a product demanded given a change in its price.

Price elasticity of demand or PED can be calculated as follows:

PED = Percentage change in the quantity demanded Percentage change in its price

There are three types of price elasticity for demand — elastic, inelastic and unit elastic:

Demand is relatively elastic (high PED) The PED is responsive or high (a number that is greater than 1) if the quantity of a particular good or service demanded changes by a larger proportion than the change in price; for example, a 10 per cent rise in price results in a 20 per cent contraction in the quantity of a good or service demanded (i.e. PED = 20/10 = 2). In this case, buyers are easily able to defer or switch their demand elsewhere in response to higher prices. An elastic demand means that if prices rise, the total revenue or value of consumer purchases (which equals the unit price multiplied by the quantity demanded or purchased) decreases. When drawn, the elastic demand line is fairly flat.

Demand is relatively elastic (responsive)

Price/unit ($) P P 2 1 Q2 Q1 Quantity demanded

Demand line Demand is of unit elasticity (medium PED) The PED is medium (a number that is equal to 1) if the quantity demanded changes by the same proportion as the change in price. Here, a 10 per cent rise in price results in a 10 per cent contraction in the quantity demanded (i.e. PED = 10/10 = 1). Consequently, total revenue remains unchanged with a rise in price.

Demand is of unit elasticity Price/unit ($) P2 P1 Demand line Q2 Q1 Quantity demanded Demand is relatively inelastic (low PED) The PED is unresponsive or low (a number that is less than 1) if the quantity demanded changes by a smaller proportion than the change in price. Here, a 10 per cent rise in price results in only a 5 per cent contraction in quantity demanded (i.e. PED = 5/10 = 0.5). In this situation, buyers are unable or unwilling to significantly contract demand. Consequently, total revenue increases with a rise in price. When drawn, the inelastic demand line is fairly steep. Note, however, that in order to use the slope of the demand line to indicate the degree of elasticity, the same scale has been used on both axes.

Demand is relatively inelastic (unresponsive) Q2 Q1 P2 P1 Quantity demanded Price/unit ($) Demand line Determinants of the price elasticity of demandUNCORRECTED PAGE PROOFS The price elasticity of demand (PED) or responsiveness is affected by a number of factors: • Degree of necessity. The demand for necessities, such as basic foods, rental accommodation and medical attention, is normally relatively price inelastic. In contrast, the demand for non-necessities like luxury cars, holidays and entertainment is usually relatively price elastic because demand can be deferred or abandoned altogether. Whether the demand for a good is price elastic (because it is a non-necessity) or price inelastic

(because it is a necessity), can even be affected by changes in government laws. For instance, during the

COVID-19 pandemic, the mandatory wearing of face masks made demand less price sensitive, or more inelastic to a change in price. • Availability of substitutes. The demand for substitutes (e.g. wool and synthetics, butter and margarine,

Australian wheat versus overseas wheat, different breakfast cereal) is usually fairly elastic, while that for unique products (such as petrol for most car owners, eggs) is quite inelastic. Where close substitutes are available, there is greater price sensitivity. In other words, if the price of one substitute rose, consumers would switch their demand to the other product, causing a significant contraction in the quantity of the original product demanded. • The time period. Time has an effect on elasticity. In the long-term, the demand for most things tends to be more elastic than in the short-term, when demand is more inelastic. Time gives buyers the opportunity to find alternatives or substitutes, or change their habits. • Proportion of income. Expensive things representing a high proportion of household income or spending tend to have a more elastic demand because consumers weigh up the costs and benefits more carefully and are less impulsive. In contrast, cheaper items representing a lower percentage of our spending have a more inelastic demand because the decision is less important and doesn’t matter much one way or the other. 1.8.2 Factors affecting the price elasticity of supply Price elasticity of supply helps us understand the behaviour of sellers in a market. According to the law of supply, the quantity supplied of a particular good or service varies directly with a change in its price. It measures the responsiveness, or sensitivity of the quantity supplied to the percentage change in price (i.e. whether the quantity supplied expands or contracts by a large or a small percentage). This elasticity is reflected in the steepness of the supply line.

Price elasticity of supply or PES can be calculated as follows: Price elasticity of supply

measures the responsiveness or sensitivity of the quantity of a product supplied given a change in its price.

PES = Percentage change in the quantity supplied Percentage change in its price

There are three degrees of price elasticity of supply — elastic, inelastic, and unit elastic: Supply is relatively elastic (high PES) The PES is said to be responsive or elastic (a number that is greater than 1) if the quantity of a particular good or service offered for sale changes by a larger proportion than the change in price; for example, a 10 per cent rise in price results in a 20 per cent expansion in the quantity supplied (i.e. PES = 20/10 = 2). In this case, firms can easily expand output in response to the rise in price. When drawn, the Price/unit ($) P2 P1 elastic supply line is fairly flat.

Q1 Q2 Quantity supplied

Supply line Supply is relatively elastic (responsive)UNCORRECTED PAGE PROOFS

The PES is of medium elasticity (a number that is equal to 1) if the quantity supplied changes by the same proportion as the change in price. Here, a 10 per cent rise in price causes a 10 per cent expansion in the quantity supplied (i.e. PES = 10/10 = 1).

Price/unit ($)

P2

P1 Supply line

Q1 Q2 Quantity supplied Supply is relatively inelastic (low PES) The PES is described as unresponsive or low (a number that is less than 1) if the quantity supplied changes by a smaller proportion than the change in price; for example, a 10 per cent rise in price produces only a 5 per cent expansion in the quantity supplied (i.e. PES = 5/10 = 0.5). Here, firms are relatively unwilling or unable to respond to the rise in price. When drawn, the inelastic supply line is fairly steep.

Supply is relatively inelastic (unresponsive)

Price/unit ($) Q1 Q2 Quantity supplied

Supply line P2 P1 Determinants of the price elasticity of supply The price elasticity of supply (PES) is affected by a number of factors: • Product storability and durability. Items that are durable and can be stored successfully without deterioration, such as minerals, wheat, wool and red wine, generally face a more price elastic supply line. In such cases, a rise in price means that sellers can quickly and simply access the extra supplies by reducing their stocks of unsold goods. Services tend to face a more price inelastic supply because they cannot generally be stored. • The availability of spare capacity. The quantity of a particular item supplied is likely to be more price elastic if production levels can be readily and inexpensively changed by moving resources between industries. Supply is especially elastic when there is unused or spare productive capacity in an industry or firm. Here, the quantity supplied can be expanded quickly following a rise in its price. • The time period. In the short-term, it is often difficult for firms to expand supply following a price rise for their product, especially if resources are immobile and can’t be moved easily between different uses. In this case, supply is relatively more price inelastic. However, in the long-term, supply becomes more price elastic. Over a greater number of years, the availability of new technology and/or most resources can be shifted or increased, making supply more responsive to price changes. 1.8.3 The significance of price elasticity of demand and supply Price elasticity has at least two important and practical implications for sellers and governments. 1. The pricing policies of sellers. When pricing their products, businesses consider the price elasticity of demand for their goods or services. For example, retailers such as Myers, Target or Harris Scarfe frequently have sales offering 10 or 20 per cent discounts on their usual prices. Normally this would be expected to UNCORRECTED PAGE PROOFS cut their total revenue, but this will not happen if the demand for their goods is responsive or elastic (with a high PED). Other firms are in the fortunate position of being able to increase prices when their products are essential and have no close substitute. Because demand for their goods is relatively unresponsive or inelastic (with a low PED), they will actually increase their revenue and profits.

2. The raising of government revenue. Governments always seem to be short of revenue. If raising revenue was their main goal, governments would select products with a low or inelastic PED (tobacco, alcohol, petrol, healthcare) and put a heavy excise tax on these items, which would raise their prices. Addicted, illinformed or trapped consumers with no other choice would mostly keep shopping and pay the higher taxes.

Being unresponsive, demand would not contract greatly and the government could raise a lot of revenue.

However, if the main aim of the government’s excise taxes on alcohol, tobacco or fuel was to substantially contract demand and change buyer habits that are damaging society or individuals, the policy of heavily taxing such products would have limited success if their PED is low. Resourceseses Resources Weblinks Demand and supply explained (1 of 2) Demand and supply explained (2 of 2) Shifting demand and supply Demand, supply, equilibrium, curve shifts (EconMovies 4: Indiana Jones) Supply and demand Price elasticity of supply Price elasticity of demand The effects of a tax on D–S, taxes on producers Marginal analysis (EconMovies 2: Monty Python and the Holy Grail) Changes in supply, demand and market equilibrium Interactive demand and supply diagram 1.8 Activities

Students, these questions are even better in jacPLUS

Receive immediate feedback and access sample responses Access additional questions

Track your results and progress Find all this and MORE in jacPLUS 1.8 Quick quiz 1.8 Exercise 1.8 Exercise 1. a. Define price elasticity of demand. (1 mark) b. List three influences on the price elasticity of demand. (3 marks) 2. a. Define price elasticity of supply. (1 mark) b. List three influences on the price elasticity of supply. (3 marks) 3. Using an example, explain the economic importance of the concept of elasticity. (2 marks) 4. a. Define what is meant by the term price elasticity. (1 mark) b. The demand for tobacco is price inelastic. Explain what this means, providing two reasons. (3 marks) c. Given the price inelasticity of demand for tobacco, explain one important advantage and one important disadvantage of a government policy that increases the tax on tobacco sellers, by 12 per cent, in an effort to reduce smoking and its harmful effects. (2 marks) d. In the longer term, the price elasticity of supply for most goods tends to be more elastic than in the short-term. Explain what this means, suggesting one important reason for this observation. (2 marks)UNCORRECTED PAGE PROOFS

e. Examine table 1.6. Classify the various types of goods or services shown in the table, as to whether their demand and supply is likely to be price elastic or price inelastic, giving brief reasons for your answer.

(4 marks)

TABLE 1.6 Classifying price elasticities for different products

Good The likely price elasticity of demand is … The likely price elasticity of supply is …

i. Petrol ii. Bananas iii. Pepper iv. Gold f. Use the hypothetical data contained in table 1.7 below to: i. calculate the PED ii. explain if the good has an elastic or inelastic demand. (2 marks) TABLE 1.7 Calculating the price elasticity of demand

Product Percentage change in price Percentage change in quantity demanded Calculation-the PED = Is the demand for this product is price elastic or price inelastic? Why?

A bottle water sold in the desert 40 10 .............. .............. A 500g tub of margarine

20 30 .............. .............. Solutions and sample responses are available online. 1.9 Types of market failure and government intervention to address market failure in Australia’s economy KEY KNOWLEDGE • types of market failure: public goods, externalities, asymmetric information and common access resources • the role and effect of indirect taxation, subsidies, government regulations and government advertising as forms of government intervention in the market to address market failure. Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. We have already seen that efficiency in resource allocation occurs when inputs are used to produce particular types of goods and services that help to maximise the general satisfaction of society’s needs and wants, and overall wellbeing. In general, the free operation of competitive markets is usually a very efficient way of allocating resources between alternative uses into areas where they are most wanted. This is especially the case UNCORRECTED PAGE PROOFS when the preconditions for competitive markets are largely met; for example: • strong competition exists between buyers and sellers in the market • firms are price takers (not price makers) and no firm has significant market power • product differentiation and brand names do not exist (the product is homogeneous) • there is a large level of consumer sovereignty that guides how resources are allocated

• buyers and sellers have complete information about the product and market (perfect knowledge) • there is ease of entry and exit by producers in the market • sellers and owners of resources aim to maximise their profits and incomes.

FIGURE 1.25 In Australia, we have a largely market economy where buyers and sellers of goods and services negotiate relative prices. While the operation of the market mostly makes good economic decisions that improve society’s general wellbeing, sometimes it fails. As a result, it damages our general wellbeing and living standards may suffer. Correction of this may require government regulation or intervention. Market failure occurs when the price system allocates resources inefficiently, reducing the overall satisfaction of society’s wants, wellbeing and living standards. This can occur when there is weak competition, externalities, public goods, common access resources and asymmetric information. Governments may attempt to reduce market failure perhaps by imposing indirect taxes on socially undesirable goods, paying subsidies to promote socially beneficial goods, using informative advertising to educate economic agents, directly providing beneficial goods and services, and passing laws that force or prohibit certain behaviour. Government failure occurs when the government intervenes in a market using various policies that are intended to improve efficiency in resource allocation and living standards, but which unintentionally, lowers efficiency, and the general satisfaction of society’s wants and wellbeing. In certain circumstances, however, the market fails to use resources efficiently, thereby lowering society’s general wellbeing. This results in market failure where society’s general wellbeing is not maximised. When market failure occurs, governments often intervene with a range of policies designed to reduce market failure and improve how resources are used. These strategies might include: • using indirect taxes to discourage the production and/or consumption of socially undesirable goods and services • paying subsidies to encourage the production and/or consumption of socially desirable goods and services • passing various laws to alter the behaviour of households and/or businesses • engaging in educational or informative advertising to improve knowledge and consumer and business awareness • setting minimum or maximum prices in selected markets • using policies that promote strong competition, cut costs and increase efficiency. In these ways, the Australian government directly or indirectly allocates around UNCORRECTED PAGE PROOFS 15−20 per cent of all resources. It is worth remembering that government Possible examples could include subsidising the coal industry, intervention is not always a roaring success. Sadly, as we shall later see, setting the minimum wage and government failure sometimes occurs. Whether this interference in resource perhaps government schemes to allocation is justified depends on whether it results in a net gain in society’s increase housing affordability and ownership.general wellbeing.

The overwhelming reason for having at least some government regulation or influence over resource allocation, is to correct market failure and improve society’s general living standards. Market failure exists when the operation of the price system fails to maximise society’s general wellbeing.

As illustrated below, there are at least five major instances of market failure that can justify having some government interference or regulation:

The abuse of market power The existence of asymmetric information

The occurance of positive and negative externalities The provision of public goods by the private sector

The misuse of common access resources Five common types of market faliure 1.9.1 Markets can fail due to the abuse of market power We have already noted that strong competition helps to guarantee good outcomes such as efficiency, quality and relatively low prices. However, economists note that when market power is exercised by oligopolies and monopolies in an industry, it is likely that sellers will sometimes restrict competition and output, lift prices (since such firms are price makers rather than price takers), reduce efficiency in resource allocation and lower customer service and purchasing power, causing market failure by reducing the general satisfaction of society’s wants and wellbeing. In this situation, the government could improve market outcomes through various measures designed to enhance competition. Government policies to reduce the abuse of market power There are at least three types of government policy designed to reduce market failure associated with the abuse of market power: • Government deregulation of key markets to promote competition: Over the past three decades there has been partial deregulation (removal of unnecessary government restrictions to competition) of some important markets including those for labour, capital, primary produce, telecommunications, electricity, water, milk and aviation. The hope is that the level of competition between sellers will be greater, creating increased efficiency, lower prices and improved living standards. For instance, in the labour market, the old system of centrally determined minimum wages set by the Fair Work Commission has gradually become less important. Instead, there has been partial deregulation with an extension of a decentralised wage system involving greater flexibility and firm-by firm-enterprise bargaining or pay agreements linked to productivity. Deregulation reforms like these expose industries and workers to greater competition by removing government restrictions and by breaking up both public and private monopolies and oligopolies. • Government cutting of import tariffs and liberalising international trade to promote competition: Tariffs are an indirect tax added to the price of imports. They are designed to make foreign goods dearer and less attractive, thereby reducing competition for local firms. For many years the federal government has been cutting tariff rates and progressively moving towards freer trade. Indeed, from an average tariff protection level of 38 per cent in 1968–69, the general rate of tariffs on most manufactured items fell by 2.5 per cent a year since the late 1980s, to effectively reach less than 1 per cent in recent years. As a result, to lift UNCORRECTED PAGE PROOFS efficiency in resource allocation and survive, local firms have had to improve product quality, restructure operations and cut their production costs. It means that our resources are increasingly allocated into areas where Australian industry has a comparative cost advantage. As a result, living standards should rise.

• Government laws to promote price competition and regulate monopolies: Generally, competition promotes greater efficiency in resource allocation and hence higher living standards. With this in mind, the Australian Competition and Consumer Act 2010 (formerly called the Trade Practices Act) requires that Australian firms compete with each other. Activities like price maintenance, price leadership, market zoning, interlocking directorships and exclusive dealing are illegal. Heavy fines of up to $10 million per occasion are imposed on companies that break the law, and directors who break the law may face jail sentences. Company takeovers and mergers not considered to be in the interests of consumers are exposed and closely scrutinised. Furthermore, the Australian Competition and Consumer Commission (ACCC) undertakes ongoing price surveillance of industries where competition is weak, such as petroleum, banking, insurance and power. Firms in both public and private sectors are required to justify increases in the prices they charge. 1.9.2 Markets can fail due to asymmetric information Asymmetric information exists in a market where buyers Asymmetric information is a second situation where there is market failure. For markets to allocate resources efficiently, buyers and sellers need to have complete and reliable knowledge of all the relevant information affecting their economic decisions. Unfortunately, this is not always the reality because one group in the market may have more knowledge than others. Often, for example, sellers have more information than buyers in a transaction, so rational choices and efficient decisions about resource allocation cannot be made. Here, the market fails because society’s overall wellbeing is reduced. This imbalance in knowledge is called asymmetric information. There are many instances of this type of market failure; for example, insider trading in the share market (when shares are either bought or sold based on information that is not revealed to the rest of the market, such as the discovery of a new gold mine), those peddling false information perhaps using social media, rogue elements in the used-car market (when sellers hide or cover up mechanical problems with the cars they sell), online shopping and dating (where buyers cannot physically inspect the goods before making their decision), the building trades (where costs have been cut by inferior workmanship), an employer hiring a new employee, and harmful ingredients used in producing food, tobacco and, in the past, asbestos-based cement sheeting. Government policies to reduce asymmetric information Again, the logical solution to market failure due to asymmetric information is for governments to intervene using two main strategies. • Government laws about full product disclosure: One approach is that the government could pass laws requiring full product disclosure by sellers of all relevant information needed for effective decision making by potential buyers through appropriate legislation, such as useful labelling on products including food and medicines. These laws could make it illegal for sellers to withhold certain information; for example, laws about the responsibilities of company directors to accurately inform and update investors of business conditions and prospects that affect decision making, or product labelling requirements that warn users of potential hazards or dangers. • Government informative advertising and educational campaigns: The government could conduct an advertising campaign to educate and inform consumers of potential dangers of products so that more effective choices can be made and resources allocated efficiently to maximise society’s wellbeing. An example of this is the QUIT campaign, which aims to make people stop smoking, the anti-drink driving. In addition, other attempts include the sun protection campaigns, and the COVID-19 vaccination campaign to reduce severe illness, deaths and lockdowns. In addition, improving the speed and level of public access UNCORRECTED PAGE PROOFS to the internet (by, for example, the rollout of the National Broadband lack complete and accurate information required to make

Network or NBN) can help facilitate effective research by buyers and sellers, rational decisions about how to and improve their knowledge and understanding of the consequences of their use their resources. economic decisions.

Externalities are a third source of market failure that can reduce efficiency in the allocation of resources, and hence undermine society’s general wellbeing. They represent extra costs or benefits for third parties (someone not directly involved in the particular transaction) that may arise when goods and services are produced or consumed. There are two types of externalities: negative and positive.

Negative externalities • Negative externalities are costs paid, or borne, by third parties arising from the production or consumption of a good or service. They can occur, for example, when a factory producing chemicals releases unpleasant odours that we are forced to breathe, even though we do not use that firm’s products. The smoking of cigarettes in public also causes costs to third parties in the form of health issues from passive smoking, and the burden on public hospitals and taxpayers who foot the bill from the consumption of tobacco, rather than the tobacco companies. Another example occurs in the generation of coal-fired power stations with the release into the atmosphere of carbon dioxide emissions that lead to global warming, severe weather events and climate change that may then contribute to the flooding of island communities, displacement of populations and wild weather events that damage the properties of others and cause the loss of lives and production. These costs are not paid by the producers who have created the damage. The costs of the damage for them will be zero, thereby inflating their profits. This problem distorts the efficient allocation of resources and causes socially undesirable goods and services to be over-produced. Negative externalities lead to a misallocation or resources that represent market failure because they lower society’s general wellbeing and living standards. Governments often seek to reduce negative externalities and improve living standards using various measures including legislation, indirect taxes, cash subsidies and advertising. Externalities represent a market failure and are the costs (called negative externalities) or benefits (called positive externalities) that arise from the economic activities of firms (producers) and households (consumers) that are passed on to third parties not directly involved in the original activity. Positive externalities result in the underproduction of socially beneficial goods, while negative externalities result in the over-production of socially undesirable goods, in both Positive externalities • Sometimes, there are positive externalities or benefits received by third parties that arise from the production and consumption of particular goods or services. For instance, the provision of education and health are good examples of services whose provision and consumption result in positive externalities or wider social benefits, improving our general wellbeing. In other words, if you personally pay for the cost of a vaccination against the flu or measles, there are wider benefits for the general community who also benefit, even though they have paid for this. Similarly, if you pay for gaining an education to improve your knowledge, creativity and skills, others in society also benefit. Positive externalities result in the under-allocation of resources and underproduction of socially beneficial goods or services since decision makers do not factor in the full value of all the wider benefits or satisfaction gained from a given economic activity. Again UNCORRECTED PAGE PROOFS market failure has occurred because resources are not allocated efficiently in cases, reducing society’s general wellbeing. sufficient quantities and our general wellbeing will be lower than it could be.